It seems as though the true costs of the financial crisis are to be much worse than originally expected.
Please don’t misunderstand me, I am a red-blooded capitalist. I always have been and always will be. I believe completely in free markets (business and financial). But even by my standards, things are going too far and somehow, a new breed of capitalism in financial markets needs to be found.
This quote is taken from EurActiv on the lead story on 29th November, “Ireland will contribute 17.5 billion euros of its own cash and pension reserves towards the bank rescue.”
Pension reserves, eh? When did that start???
And then in this story by EurActiv, “In November, Hungary and Bulgaria came up with very similar policies that embarrassed those attempting to provide an EU-wide solution to budget accounting of the cost of pension reform.” and “The move raised eyebrows in the Commission as both countries decided to nationalise their pre-funded pension schemes, thus reducing both public deficit and debt calculated by the Maastricht criteria“. EurActiv continues, “Although pension fund savings are private property, the Hungarian government pre-empted any constitutional remedies by amending the constitution, just a few days before announcing the plan.”
This all seems rather reminiscent of the misdeeds of Robert Maxwell prior to his death. What did Maxwell do? Its complicated, but in short, he used the reserves of the private pension plan of the Mirror Group to prop up the price of shares in the company. When he died / drowned off his yacht, the charade was exposed as only he seemed to know what was going on. The company then really started to struggle and as the share price collapsed, pensioners in the company scheme saw the majority of their pension fund vanish.
Parts of this are similar to the collapse of Enron in the United States. As Enron collapsed, most employees had used wages and bonuses to purchase equity in the company and it then transpired that the company pension scheme owned a very large amount of company stock. The share price had in part been propped up by the buying of the pension scheme.
These acts were considered to be illegal. Luckily for the rest of society, they caused retirement issues for thousands of people, rather than millions of people. But it seems as though the financial crisis is causing European governments to up the stakes.
We all know that the demographics of Europe suggest that funding the retirements of millions of people – as we all live longer – is becoming harder and harder. We also know that most state pension schemes are very similar to Ponzi Schemes in nature. The phrase ‘pension fund’ is often applied poorly to state schemes. The vast majority have no fund. All the money that comes in via social security payments, then goes out in the form of benefits.
But if those that have some form of fund start to prop up their economy with the money, are we moving into the government sponsored worlds of Maxwell and Enron? This cannot be a good thing for the majority of society, can it?
If these actions were illegal and ruinous on a much smaller scale, what makes sensible and educated people think that they will work when scaled up to a national or continental level?
Obviously, there are differences. Propping up a share price is different to propping up an economy, but it still sounds very much like a misuse of funds.
EU Blogger, Michael Berendt, in his recent post highlights a few of the potential social problems. And in content from earlier in 2010, the European Economic and Social Committee held an entire event to investigate the social costs of the financial crisis.
My real question then, relates to moral hazard and to the fundamental nature of the euro currency. At what point is enough enough? At what point is something not worth saving? At what point is the cost of saving bankers and investors not worth paying? Who is deciding who ought to be saved and why? At what point is the cost of saving the economy of a nation not worth paying?
Bearing in mind that I am an investor (and I own some shares in a bank!) this is hard for me to ask. But ask we must.
When is the juice no longer worth the squeeze?
As if this all was not bad enough, there are a number of very sensible financial people (the FT has been quite vocal on this for example), suggesting that the cost of servicing the interest bill for Greece is unsustainable and that they will default. It is a matter of when and not if. The cost to Ireland of servicing their IMF and EU bailout bills may also be unsupportable.
These bailouts might simply be bankrupting nations, slowly sucking the blood from them, whilst we wait for their total financial collapse (as suggested about Ireland by Wolfgang Munchau in the Irish Times here). This would be terrible.
Even worse, I don’t think I have yet spoken to anyone that believes that these bailouts will work in theory. If people don’t have even that basic faith, what must the hedge fund managers with their billions looking for ‘opportunity’ be thinking? They must be rubbing their hands with glee at the thought of the tens of billions in profits that they will make over the next few years. That is ‘our’ (and German!) money. Bonus time anyone?
The often excellent blog, The Baseline Scenario, writes of The Eurozone Endgame and four alternative scenarios, including, “Third, there is the thoughtful view of Willem Buiter – currently chief economist at Citigroup and still a brilliant critic of the global financial system. In a presentation circulating last week (not publicly available), he predicts “three or more sovereign defaults in the next five years.” His logic is impeccable – once it is easier to restructure debts, the temptation is to do exactly that; the market knows this and so brings everything forward in time.”
And the ever present Nouriel Roubini is reported by Reuters as saying, “(A bailout) happened in Greece. It happened in Ireland, and it’s going to happen in Portugal,” Roubini told a conference in the Czech capital. “The question is whether it could happen in Spain. The official funds are not sufficient for also bailing out Spain.”
Needless to say, the Portugese goverment is now expressing confidence in their economy in the hope of dispersing the blood that has already dripped into the water and started to attract the sharks.
This is, of course, manna from heaven for the eurosceptic press, such as the Daily Express in the UK who lead on their frontpage on Tuesday with, “A bail-out agreed by Chancellor George Osborne means Britain could have to find billions of pounds more to help Portugal and other debt-laden countries such as Spain and Belgium if their economies need to be rescued, as some experts are predicting.”
Are we witnessing the beginning of the end of the European political and social model? And the creation of new generations of financially underprivileged people across Europe? Are we thrusting the current generation into poverty in their retirement years?
Are banks really this important?